Commentary on Political Economy

Monday, 24 October 2011

Keynes and the General Theory – Science, Economy and Society

If “the economy” is a “mechanism” that connects automatically
a given quantity of “inputs” with a given quantity of “outputs”, it is
“axiomatic” that there must be a “scientific and mathematical” way of ensuring
that this “economy” functions “automatically” – and that can be obviously by
eliminating or avoiding any “disturbances” (external shocks) or “interferences”
(political measures and institutions) from influencing or disrupting its
operation. “Crises” therefore are not “internal” to the economy, but entirely
“external”. Indeed it can be said that if the economic laws of the marketplace
economy are kept in place, its reproduction
will be in large part “spontaneous” or “automatic”. And it is equally obvious
that for a society to reproduce the aggregate “savings” of the society must
equal the aggregate “investments”: this, in a nutshell, is the meaning of Say’s
Law: it is what must obtain to ensure that the sought-after “equilibrium” of
the economy is attained, whether one adopts “socialist” or “liberal” policies.

Say’s Law is the tangential point that connects the
socialist circle with the liberal line. And it is Say’s Law – the fundamental
Law of Economics – that makes possible the determination of an “economy” that
operates “spontaneously” and “automatically” if the laws of economics are
respected, in such a way that civil society, the Economy, can function entirely
independently of the Political, of the State, where the State is a “negative
State”, like the “economy” a mere “machinery”, confined to the protection of
the self-regulating market and ensuring that “public opinion”, the moral and
religious persuasions of “citizens”, do not interfere with the market and are
confined to the “public sphere” of debate and deliberation. This homologation
of the Political, which allows “citizens” to exist as moral members of a
dialectical “public sphere”, and of the “scientific necessity” of the Economy
where the “individual” attends to his “self-interest” according to his needs,
as a “bourgeois” – this homologation of the conventional sphere of the
Political and the hypothetical mechanism of the Economy is what unites both
Classical Political Economy with Neoclassical Political Economy.

In this schema, universally accepted before the Great
Depression, the State is seen as a “nightwatchman state” (in Lassalle’s phrase),
as a “State of Law”, as the enforcer of laws that protect the homologation
achieved by the Political Economy for the efficient operation of the economy in
a free society. In this schema, the State plays absolutely no significant part,
if it plays any part at all, in the substantive functioning of the economy
except as a “guardian”, except as “police”, ensuring that the “self-interests”
of the individual “bourgeois” are kept within the ambit of the laws of the
market so as to preserve “life, liberty and estate”. But this is precisely
where the homologation, the equi-valence of the Political sphere and the
Economy breaks down. - Because the “self-interest” of the individual market
participants may not necessarily “converge” or be consistent with the “self-interest”
of other individuals. As Marshall
had warned with regard to Jevons’s mathematical calculations of marginal
utility, these assumed that the individual “utilities” of the “individual” were
compatible with those of other “individuals” within the sphere of exchange
defined and regulated by the market! Now, this assumption was mere “economic
dogma” and could in no guise lead to the certainty of “concrete truth”. The
“laws of economics” presuppose axiomatically the existence of a “common
utility” between all market agents; they postulate the existence of a Smithian
“enlightened self-interest” whereby the self-interest of the single bourgeois
is somehow compatible with that of every other bourgeois at least in the sense
that they can “co-exist”. Even assuming the existence of “economic laws”, it is
evident that the “agreement” by all market participants to abide by them is
dependent on the “scientific rationality” of individuals and on the existence
of a “civil society” in which there is consensus to be governed by a State, by
political institutions, that will enforce the undisturbed operation of the
“self-regulating market”.

It is precisely the assumption in both Classical and
Neoclassical economics of the axiomatic necessity of the existence and of the
spontaneous automatic operation of these “institutions” that Keynes challenges
from the very first sentences of the General Theory.

I have called this book the General Theory of
Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title
is to contrast the character of my arguments and conclusions with those of the classical [1] theory of the subject, upon which I was
brought up and which dominates the economic thought, both practical and
theoretical, of the governing and academic classes of this generation, as it
has for a hundred years past. I shall argue that the postulates of the
classical theory are applicable to a special
case only and not to the general case,
the situation which it assumes being a limiting point of the possible positions
of equilibrium. Moreover, the characteristics of the special case assumed
by the classical theory happen not to be those of the economic society in which
we actually live, with the result that
its teaching is misleading and disastrous if we attempt to apply it to the
facts of experience. (p3)

Rightaway, Keynes invites his readers to reverse the order
of analysis of “classical” (orthodox bourgeois) economic science: the “laws”
postulated by that “science” apply only as a “limiting point of the possible
positions of equilibrium”; they represent only “a special case” whose
characteristics “happen not to be those of the economic society in which we
actually live”. Gone, therefore, are the “axioms” of “economic dogma”; gone are
the postulates of economic science with its neat mathematical equations and its
“certainties” of rigorous “existence” of “equilibrium”. The only “existence”
that is relevant is not that of mathematical equilibria, but the ec-sistence of
this society – “the economic society in which we actually live”! There is no
“necessity” to these “characteristics”: they simply “happen” not to be those of
the existential reality in which we “actually live”. Life is not mathematics;
“concrete truths” are not “universal truth”. Beneath the apparent “automatic”
functioning of the market laws there lies a social reality that is as complex
as human existence, as “meta-physical” as the very “metaphysics” that
neoclassical economic science despises!

Just as Einstein had shattered the “uni-versality” of
Newtonian physics, just as Nietzsche and Heidegger had “trans-valued” the old
values of Western metaphysics – so now does Keynes turn upside down or
“reverse” the perspective of Neo-Kantian and Machian economics. Nothing is
absolute: everything is relative. To orient ourselves in this society we must
ensure that the so-called “laws of economics” that supposedly maximize the
“welfare” of the society do not destroy first in the process of their
“theoretical” operation the very “society” on which they are founded: “with the result that its teaching [that of
orthodox economics] is misleading and disastrous if we attempt to apply it to
the facts of experience”.

And “the facts of experience” teach us instead that there
are forms of behaviour or “institutions” that are peculiar to “the economic society in which we live”: not all or
every (!) “economic society”, then; only the one “in which we live”. And this
“economic society” happens to be a capitalist society. Society comes first; economics
later. If we wish to preserve “this” (!) society – a “capitalist” one – we must
then adapt existing institutions and adopt new ones that will ensure the
survival and reproduction of a specifically “capitalist” society: we must
prescribe the institutions that can make up a “society of capital”! To insist
with abstract “economic laws”, to affirm their “eventual” triumph – “in the
long run” – can lead only to the tearing of the fabric of this society on which
this “economy” is founded.

The celebrated optimism of traditional economic theory, which has led to
economists being looked upon as Candides, who, having left this world for the
cultivation of their gardens, teach that all is for the best in the best of all
possible worlds provided we will let well alone, is also to be traced, I think,
to their having neglected to take account of the drag on prosperity which can be
exercised by an insufficiency of effective demand. For there would obviously be
a natural tendency towards the optimum employment of resources in a Society
which was functioning after the [p.34] manner of the
classical postulates. It may well be that the classical theory represents the
way in which we should like our Economy to behave. But to assume that it
actually does so is to assume our difficulties away.

Therefore, “in the long run we are all dead” does
not mean (as many superficially take it to mean) that “all things must pass”!
Keynes is saying instead that if we choose to adopt “the long run” as an
inflexible mode of conducting capitalist society – then, in that “long run”, “we as capitalists”, the economic, capitalist
society “as we know it”, “in which we actually live”….will die (!), and
“we, the capitalists, will die with it”. Keynes is not referring to “mankind”
in general: he is addressing his own class and this society, which is the only
form of civilized society that he knows, that he can conceive as worthy of inhabiting. That it is the survival of “bourgeois society” that Keynes
had in mind, that this was the context in which his famous maxim was uttered,
is illustrated clearly and dramatically by Hayek’s direct response to the
Keynesian subversion of the nature and content of “economic analysis”, from
“science” to virtual “policy”.

I cannot help regarding the increasing concentration on short-run effects—which in this context
amounts to the same thing as a concentration on purely monetary factors—
notonly as a serious and dangerous intellectual error, but as a betrayal of the
main duty of the economist and a grave menace to our civilization….It used, however, to be regarded as the
duty and the privilege of the economist to study and to stress the long-run
effects which are apt to be hidden to the untrained eye, and to leave the concern about the more
immediate effects to the practical man, who in any event would see only the
latter and nothing else.3 (Hayek, The Pure Theory of Capital, p,409). (my
emphases)

The polemic with Keynes is evident. “In the long run, we are
all dead”, of course, but Hayek hankers by “spontaneous”, “long-term” processes
(he would refrain from saying “natural”, as in the “natural prices” of
long-term equilibrium) - processes that display the “underlying logic of human
action”, - an “open-ended” notion, to be sure, but one from which a “pure logic
of choice” may be distilled (the word used by Bohm-Bawerk in his tirade against the German Historical School) – a spontaneous order to be protected from
the extrinsic “short-term policies”
introduced by “interventionist” governments and the “disturbances” that they
cause, as displayed by “the trade cycle”. To interfere with this “pure logic of
choice” or “science of choice” is not only “an intellectual error”, but a
“betrayal and a grave menace” to civilization itself!

“But it is alarming to see that after we have once
gone through the process of developing a systematic account of those forces which in the long run
determine prices and production, we are now called upon to scrap it, in
order to replace it by the short-sighted
philosophy of the business man raised to the dignity of a science. Are we
not even told that, "since in the long run we are all dead", policy
should be guided entirely by short-run considerations? I fear that these
believers in the principle of apres nous le deluge may get what they
have bargained for sooner than they wish,” (p410, my emphases).

For Hayek, it is the Keynesian urge to interfere with the
“spontaneous order” of social life as encapsulated in the tenets of economic
“science” that represents a nihilistic betrayal both of science and of
civilization. Keynes’s “General Theory” is the abandonment of reason for the
very “short-run” preservation of capitalist society – an “interference” with “those
forces which in the long run determine prices and production” done in the name
of a “short-sighted philosophy” that can only compound and hasten (“sooner than
they wish”) the decadence and decay and decline of “civilization”, that is to
say, of bourgeois society and its “economy”.